Fresenius stunner leaves high-yield in awe

Fri Jan 11, 2013 9:34am EST

* Fresenius' 2.875% coupon a new record low for European HY

* Bond spread more akin to a Triple B issuer

* Some investors see Fresenius bond as cash substitution

By Natalie Harrison

LONDON, Jan 11 (IFR) - German healthcare company Fresenius beat its own expectations and left the high-yield market in shock, after pricing a bond with a record low coupon of just 2.875%.

Fresenius Finance, rated Ba1/BB+ - the top end of high-yield territory - priced the no-grow EUR500m July 2020 bond at par on Thursday, having initially anticipated to pay an interest rate in the low-3% area when it set out on Monday.

Fresenius Chief Financial Officer Stephan Sturm said strong demand for the deal - aimed at both retail and institutional investors - was due to multiple factors.

Chief among those is the group's regular bond issuance, which has enabled investors to get more comfortable with the credit, and its established name in the German retail market.

"In turn, knowledge of that strong retail bid has attracted institutional accounts," said Sturm.

"We are deep into Crossover territory, which investors are comfortable with. And - given that we are a repeat issuer - we always try to ensure that our bonds do not trade down in the secondary market."

The bonds, which priced at par, were bid at 100.25 on Friday, bankers said. The bonds were also seen as an attractive substitute to cash.

Fresenius now holds the record for the lowest coupon in the European high-yield market - smashing through its own record for a seven-year tenor, set last year when it printed a EUR500m 4.25% April 2019 bond.

It has also left HeidelbergCement - which last year printed a shorter-dated 4% EUR300m 2016 due March 2016 - in the shade, as well as Continental's 4.5% USD950m 2019 issue that was sold last September.

Ford Motor Credit still holds the sub investment grade record for the lowest coupon in the U.S. at 2.75%, according to Thomson Reuters data, but that is for a shorter dated three-year issue sold in May 2012. At the time of the deal, the issuer was rated Ba1/BB+, but has since been upgraded to Baa3/BB+.

Fresenius has clearly been propelled into the league of Triple Bs in terms of its coupon and spread - the deal priced at 178bp over the Bunds, equivalent to around swaps plus 150bp based on screen quotes.

A typical spread for a solid Triple B issuer in this tenor would be around 150bp over swaps, while weaker Triple Bs would come about 25bp back from that level, bankers said.

Late last year, Deutsche Post, rated Baa1/BBB+, and Rio Tinto, rated A3/A- printed longer-dated bonds maturing in December 2024 with the same coupon.

"Fresenius has priced its deal as if it was rated BBB rather than BB+. It's a very solid performance and evidence of the company's strong following in the capital markets," said Henrik Johnsson, head of European high-yield capital markets at Deutsche Bank, left lead on the deal.

Deutsche Bank was joined by bookrunners JP Morgan, Societe Generale, Credit Suisse and UniCredit, while Bank of America Merrill Lynch, Barclays, BayernLB, BNP Paribas, Citi, Commerzbank, Credit Agricole, DnB Nor were co-lead managers.

Although other issuers will try to get close, it will be a tough target, bankers said.

SUPPLY SQUEEZE

Another catalyst for the tightened guidance - announced at 3-3.25% on Wednesday - was the issuer's planned redemption of a more expensive 5.5% EUR650m January 2016 senior bond next month, financed by new bank facilities put in place late last year.

"There is clearly reduced supply from Fresenius, which was another major factor enabling us to tighten the coupon," said Sturm.

With the proceeds of the new bond used to refinance a 5% EUR500m senior unsecured note maturing later this month, and the redemption of the 2016 issue, the company will save itself almost EUR50m in interest costs over the next three years.

Fresenius has also steadily managed down its leverage profile.

The group's consolidated net leverage, which includes Fresenius Medical Care, stood at 2.6 times its EUR3.5bn EBITDA at the end of September 2012.

At its highest, the group's leverage stood at a multiple of 3.7 in September 2008.

Fresenius fell short of beating low spread levels achieved by firms like German scaffolding firm Peri and Italian carmaker Fiat in 2006 and 2007, at below 200bp and 100bp over mid-swaps respectively.

That, Sturm said, was one of the constraints of being a high-yield issuer - where investors remain more focused on coupons.

Given that Fresenius is well-known for growing through acquisitions, and its high-profile failed bid for Rhoen Klinikum last year still a topic of discussion, the strong demand from investment-grade funds was seen as even more remarkable.

Fresenius dropped its attempt to take over Rhoen-Klinikum in September after two other companies bought stakes to block the EUR3.1bn (USD3.9bn) merger of Germany's two biggest private hospital operators.

"Becoming investment-grade is not one of my highest priorities," said Sturm.

"Much rather, the focus is on getting the balance right between further growing the company while not over-stretching shareholders. So we continue to have a preference for debt when it comes to financing acquisitions and capex," said Sturm.

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